A Surprising Percentage Of Toronto Can Afford Million-Dollar Homes

A common thing I've been hearing is that Toronto families don't make enough to support home prices at these levels. Bank executives, economists, fund managers and even real-estate agents have repeated this in the media -- but they never offer any numbers. I always find it strange when the echo chamber gets activated, without even a single fact flowing out. Running some quick numbers shows that there's actually a good chance that this market can be supported by local incomes.

Now let's get this out of the way, first: I don't think this is a healthy market. I'm a firm believer that regression to the mean is one of the strongest rules in finance. Any sudden pop in prices will be followed with a proportional downtrend to balance. Sometimes that downtrend is hidden through inflation and devaluation of a currency, so it's not always visible at first glance. I also believe that people today are paying large premiums for future values on property. However, that's not what today's analysis is about. Today we're looking to answer the question of whether or not there's enough families that make enough to support the city's expensive prices.

19,318 sales were over a million dollars last year

The number of homes sold over a million dollars is soaring. According to the Toronto Real Estate Board (TREB), there were 19,318 sales over a million dollars in 2016. This represents a massive 77 per cent increase from the year before. This is about 17 per cent of total sales in the whole TREB region, which is also a significant number.

Household needs to make at least $150k/year

To support a million-dollar home, your family needs to make at least $150,000. At a qualifying interest rate of 4.64 per cent, you can score a mortgage of $850,000. Add to that a 20 per cent down payment (the minimum a million dollar home requires), and you have the ability to buy a place at over $1,050,000 -- conservatively speaking. So, how many households in Toronto make over $150,000 annually?

According to Statistics Canada's latest income release, a lot. They estimate 11 per cent of households in Toronto made over $150,000 in 2015 after tax. That means there's 264,110 families with the firepower to buy a $1M+ home last year. This is a 17.98 per cent increase from the year prior, which means 40,259 families joined the $150k+/year club.

The chart above shows the number of Toronto households that brought home over $150,000 after taxes. Before taxes, 415,373 Toronto households had income levels above $150,000. Source: Statistics Canada.

7.3 per cent of these families would support these levels

This is surprising to me, but there's a metric buttload of people that can afford to buy in this market. To support last year's $1M+ market, only 7.3 per cent of households that make above $150k would have needed to purchase. This is half the number of new families that started making over $150k+ annually the year prior. Sure, not all of these people are buying. A good portion of these families already have homes, and many will wait for prices to cool down. People that are good with money generally don't chase valuations. The possibility of them supporting these prices however, does exist.

There are families stretching themselves thin to get into this market.

Once again, I'm not naive. I understand that there are families stretching themselves thin to get into this market. There's mortgage fraud, a booming private lending sector and a massive number of speculators buying lower-priced properties. There's also the issue that incomes are quickly polarizing, and people on the other end of the spectrum are finding it hard to find shelter.

Cities need people at all levels of the financial spectrum to operate, so this increased premium on housing is going to have severe economic consequences. However, we now have an answer to the question if local incomes can support home prices at these levels. Yes, they can. Are well-heeled locals the ones that are buying? That remains to be seen.